WFS.PR.A Downgraded to Pfd-2(low)/Trend Negative by DBRS

DBRS has today:

downgraded the Preferred Shares issued by World Financial Split Corp. (the Company) to Pfd-2 (low) , with a Negative trend, from Pfd-2. The rating has been removed from Under Review with Developing Implications where it was placed on March 19, 2008.

In February 2004, the Company raised gross proceeds of approximately $471 million by issuing 18.85 million Preferred Shares at $10 each and an equal number of Class A Shares at $15 each. The net proceeds from the offering were invested in a portfolio of common shares (the Portfolio) that included the ten largest financial services companies by market capitalization in each of Canada, the United States and the rest of the world (only companies listed on a North American stock exchange). In addition, up to 20% of the net asset value (NAV) of the Company can be invested in financial services companies other than the 30 companies included in the Portfolio. The initial split share structure provided downside protection of approximately 57% to the Preferred Shares (after expenses).

The holders of the Preferred Shares receive fixed cumulative quarterly distributions equal to 5.25% per annum. The fixed distributions of dividends on the Preferred Shares are funded from the dividends received on the Portfolio Shares, with covered call option premium income and, if necessary, from the sale of the Portfolio’s shares. Holders of the Class A Shares receive regular quarterly cash dividends targeted to yield 8.0% per annum. The Company is currently required to generate a return of about 8% from sources other than dividend income in order to maintain a stable NAV. However, there is a NAV test that greatly mitigates this grind if the Portfolio value continues to deteriorate as no distributions will be paid to the Class A Shareholders if the asset coverage available to the holders of the Preferred Shares drops below 1.5 times (NAV of $15).

The Company’s NAV has experienced downward pressure over the past year, dropping from $22.48 per share to $16.56, a decline of 28%. The current downside protection available to the Preferred Shareholders is approximately 40% (as of June 12, 2008). The downgrade of the Preferred Shares is primarily based on the reduced level of asset coverage available to cover the Preferred Shares principal. The rating has a Negative trend due to the high hurdle rate currently required in order to avoid further deterioration in the NAV.

The redemption date for both classes of shares issued is June 30, 2011

The DBRS mass review of financial splits has been previously discussed. The issue was removed from the S&P/TSX Preferred Share Index effective December with all the other split-shares. WFS.PR.A is a member of the HIMIPref™ Split-Share Index.

Update: See also previous post for WFS.PR.A.

One Response to “WFS.PR.A Downgraded to Pfd-2(low)/Trend Negative by DBRS”

  1. […] of just under 1.6:1 as of July 10, with no jiggery-pokery about market-value / par-value. It was downgraded recently to Pfd-2(low). It closed today at 8.80-85, 20×5, after trading 10,100 shares in a range of 8.77-87. At the […]

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